Japan CPI decline expected to slow, BOJ price goal still in doubt

Reuters News
Posted: May 28, 2013 10:46 PM
Japan CPI decline expected to slow, BOJ price goal still in doubt

By Stanley White

TOKYO (Reuters) - Japan's deflation likely abated further in April and factory output picked up, but economists say the Bank of Japan is unlikely to achieve its 2 percent inflation target in two years as demand won't catch up with oversupply quickly enough.

In a slew of data due out on Friday, April household spending will have cooled slightly after rapid gains in the first quarter, a Reuters poll shows, but spending is forecast to regain momentum as consumer sentiment improves.

Industrial production is expected to have risen 0.6 percent in April for a fifth straight month of gains, indicating Prime Minister Shinzo Abe's stimulus policies continue to bolster growth, although the shift from improved sentiment to more robust activity remains gradual.

"I think the two-year time frame will be difficult because the output gap is negative and there is a lot of price competition," said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting Co.

"Still, the good mood surrounding Abe is likely to continue. Exports are improving, and production will follow that trend."

Japan's core consumer prices, which exclude fresh food but include energy, are forecast to have fallen 0.4 percent in April from a year earlier, according to the poll.

That would be slower than a 0.5 percent decline in the year to March, due partly to an increase in energy prices.

The BOJ unleashed the world's most intense burst of stimulus last month, promising to inject $1.4 trillion into the economy in less than two years to meet its pledge of achieving 2 percent inflation in roughly two years.

Many private sector economists have said that the two-year time frame is overly ambitious, and now signs of division have emerged on the BOJ's policy board.

BOJ board member Takahide Kiuchi proposed at a meeting last week that the central bank make its 2 percent inflation target a medium- to long-term goal, but his proposal was rejected.


The BOJ, by gobbling up JGBs, hopes to nudge Japanese investors out of the safety of bonds and into riskier assets like equities, encouraging more consumption, investment and employment in a virtuous circle to revitalize growth.

But the central bank's massive easing has jolted the bond market and nudged the 10-year yield to its highest level in a year last week, casting a cloud over the effectiveness of its policy.

Indeed, the BOJ may be stuck pursuing its massive monetary easing for up to five years before it stokes enough inflation to start unwinding its aggressive stimulus, a Reuters poll last week of BOJ watchers suggested.

Abe's policy mix of sweeping fiscal and monetary stimulus, dubbed "Abenomics", has driven the yen to a 4-1/2 year low against the dollar and boosted Tokyo shares by 65 percent since November, prior to his election the following month.

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Stocks have fallen 8 percent in the past four trading days, partly due to worries that the rally from last year was excessive. This has also raised questions about whether people can continue to fund their spending by cashing in on gains in their stock holdings.

Wage earners' household spending also fell 2.0 percent from a year earlier, the poll showed.

Data earlier on Wednesday showed retail sales rose 0.1 percent in April from a year earlier, less than the median estimate for a 0.4 percent decline.

Separate data on the labor market is expected to show that the jobless rate held steady in April at 4.1 percent and that the jobs-to-applicants ratio rose to 0.87 from 0.86 in March.

Japan's economy grew a faster-than-expected 0.9 percent in January-March from the previous quarter, as private consumption and a rebound in exports led a recovery from a slump last year.

Economists expect the recovery to firm up in the coming quarters backed by exports and private consumption. But risks to the outlook remain, including uncertainty in the global economy, underlined recently by a string of weak data from the United States and China, Japan's two biggest export markets.

(Editing by Shri Navaratnam)